The Hindu Business Line : LNG shipping: Have Indian owners missed the wind?

THE just-concluded tendering process by Petronet LNG Limited for hiring an LNG ship to haul cargo from Qatar to its expanded Dahej terminal in Gujarat has exposed the claims by the domestic shipping industry that the introduction of the Tonnage Tax for Indian ship-owners would enable them compete with their global counterparts on a level playing field.

This was the first global shipping tender floated by an Indian entity after the Union Government introduced the Tonnage Tax in the backdrop of the guidelines issued by the maritime regulator, the Director-General of Shipping, in July 2004 making it mandatory to ship LNG into India only on Indian-flag tankers that are owned either wholly or to a minimum of 26 per cent by Indian partners.

A consortium comprising Belgian natural gas shipping firm EXMAR, Varun Shipping Company Limited and Indian Oil Corporation had emerged the lowest bidder by quoting a charter hire rate of about $82,000 a day on the basis of deploying an Indian-flag LNG carrier when the price bids were opened by Petronet on December 1.

The Government then swung into action, rather belatedly. Following a Cabinet decision on November 24, the Cabinet Secretariat had issued an order directing the Shipping Ministry to keep the LNG transportation norms in abeyance. Petronet quashed the price bids submitted by the two consortia (the Mitsui O.S.K.Line-led consortium that included SCI, and the EXMAR-led group; the Teekay Shipping Corp-Great Eastern Shipping team which had put certain riders, was asked to withdraw the price bid) and told all the three to submit revised price bids after granting them flexibility/freedom to deploy a foreign-flag LNG carrier.

With this, the cost implications arising out of deploying an Indian-flag vessel due to 12 different taxes such as the withholding tax on borrowings from the ECB market, the dividend distribution tax and even the cost involved in setting aside 20 per cent of the net profits by a shipping company into a separate reserve account to be used only for acquiring ships under the Tonnage Tax Act were removed from the contract. Petronet was able to secure an 11 per cent lower charter hire rates with the team comprising SCI-Mitsui O.S.K Lines-NYK Line and K-Line quoting a charter hire rate of $72,880 a day which was almost $9,000 lower than what the EXMAR-led consortium had quoted in the first round.

Shipping industry experts reckon that Petronet would have got even lower rates if it had scrapped the tender and called for fresh bids without limiting the re-bidding to just the three which had submitted the techno-commercial bids in the first round. "With the removal of restriction on using a foreign-flag vessel, more bidders would have joined the fray. Intense competition would have resulted in even cheaper charter hire rates and the end use consumers of re-gassified LNG in the power, fertiliser and other industrial sectors would have benefited immensely," an industry expert pointed out. Transportation is a key element of cost while selling R-LNG to buyers.

This price differential in the charter rates between Indian-flagged LNG tankers and those flying foreign flags has taken the sting out of arguments of the domestic shipping industry while demanding Tonnage Tax, a levy based on the tonnage of shipping companies as opposed to the traditional corporate tax, that it would enable them compete globally on an even keel. About 90 per cent of the global shipping fleet operates on a tonnage tax regime that translates into an effective tax rate of 1-2 per cent against the 30-35 per cent tax corporate tax structure the shipping industry was subjected to in India.

"The domestic ship-owners squandered a golden opportunity to demonstrate that Indian-flag ships could compete globally by quoting competitive charter rates vis-à-vis foreign-flag vessels. This amply proves that Indian-flag ships are not competitive even after the introduction of the tonnage tax. It was a litmus test in which they failed," the expert said.

The outcome of the Petronet bidding process has vindicated the stand of the Petroleum Ministry, the Cabinet Secretary, Mr B. K. Chaturvedi (a former Petroleum Secretary) and even the Prime Minister himself against making free-on-board (f.o.b) contracts mandatory for LNG imports and utilising only Indian-flag vessels to transport the cargo as stipulated by the D-G Shipping.

In fact, Dr Manmohan Singh had noted that the "energy security of the country is much, much more important than the interests of the domestic shipping industry," when the earlier draft LNG Transportation Policy was submitted to him for comments.

The Oil Ministry has been clamouring for scrapping the guidelines issued by the D-G Shipping on transporting LNG on the premise that it would undermine the nation's energy security. "LNG is a seller's market now and availability of gas is at a premium. If the seller wants a cost-insurance-freight (c.i.f) shipment, the D-G's norms would be an impediment, putting the country's energy security at risk," an oil industry official pointed out. Under f.o.b. deals, the buyer makes the transportation arrangements while in the case of c.i.f contracts, the responsibility for shipping the cargo rests with the seller.

Shell India that has been moving heaven and earth to get exemption from the D-G guidelines will now be free to bring LNG cargo to its Hazira terminal on foreign-flagged LNG ships.

The development would come as a rude shock to the Shipping Ministry that has been lobbying with the Finance Ministry for grant of tax sops to the domestic shipping industry together with liberal policy measures to help it get a foothold into the highly capital intensive and lucrative LNG trade where contracts typically run for 20-25 years. "If Indian owners are denied the chance at this stage to enter and develop expertise in the LNG shipping sector, it will be lost to them forever like it had happened in the case of container trade," says Mr D. T. Joseph, Secretary, Shipping.

Petronet will shortly enter the market for at least two more LNG carriers — one for Dahej and another for the greenfield LNG terminal at Kochi. With the floodgates now opened for foreign-flagged LNG tankers to ship LNG into the country, global shipping lines engaged in the LNG trade are expected to bid on their own without having the necessity to take on board Indian partners. As a result, Indian owners will struggle to locate experienced foreign partners to overcome their lack of experience and become eligible for bidding.